Low Household Savings Rate - In the Canadian Context

I made a post about the current status of the American economy and their savings rate a few weeks ago (re: Greenspan Got It Right (again)!!).

This time, instead of focusing on the American economy, a similar phenomenon has been happening in Canada. Although our household savings rate is not as low as our neighbour's, the sign is not encouraging at all.

The Americans are having a -0.5% household savings rate (yes, it is a negative number, which means foreign countries are financing Americans' consumptions - just like what I stated a few weeks ago, and Americans are loading up their debt.)

We, the Canadians, are not much better. Our household savings rate is at the lowest on record; only at 0.5% - which means, on average, for every $100 a household earned, only $0.50 is put into savings.

Mr. Tal, the CIBC economist (see the G&M article below), basically stated what I said a few weeks ago - but in the context of the Canadian economy.

Households with no savings will suffer much more then those with savings. Savings in bank accounts help to absorb shocks brought by recessions (and that echoes my point that the U.S. is heading for a painful recession whenever it happens.)

The bright side of the picture for Canadians is most of our governments are running surpluses. Effects of shocks from a recession can be partially eased off by government spending.

Therefore, when a recession hits this continent (which will not be far away), the Canadian economy should not suffer as much as the American economy would - and let's hope that will be the case.
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Canadians not saving enough

By TAVIA GRANT

Tuesday, September 13, 2005 Updated at 3:11 PM EDT

Globe and Mail Update

Canada's personal savings rate has dropped to its lowest level since the 1920s in recent months, a phenomenon that one economist said is making people more vulnerable to economic shocks.

While the personal savings rate has been in a freefall for years, most economists had dismissed it as a poor indicator, saying the rate doesn't reflect soaring prices for assets such as houses, which have jumped almost 50 per cent since 1997 alone.

But Canadian Imperial Bank of Commerce senior economist Benjamin Tal said Tuesday the indicator shows Canadians are not saving enough to cushion them from any sudden change in economic conditions. Moreover, real-estate holdings tend to be illiquid and house prices are expected to level off in the coming year.

“The negative savings rate is reducing flexibility as far as households are concerned,” said Mr. Tal in an interview. “That will have an impact on their ability to respond to any economic shocks, be it higher energy prices, higher interest rates or an economic recession.”

Because Canadians have almost no savings, economic shocks could be exacerbated by a slowdown in consumer spending, the main driver of Canadian economic growth, Mr. Tal said.

His report comes after Statistics Canada said last month that the rate plummeted to 0.5 per cent in the second quarter. In the U.S., meantime, the personal savings rate stands at minus 0.6 per cent, the lowest level on record.

While the methodology of calculating the rate may be flawed because it doesn't include asset prices, it's been compiled in the same way for decades. Ten years ago it stood at 10 per cent, 20 years ago at 20 per cent — an indication of a significant downwards trend, he said. Moreover, all age groups have seen a steady drop in their savings rate, Mr. Tal said in the report.

He attributed the falling rate to a number of reasons, among them lower inflation expectations, an extended period of low interest rates, a slower pace of personal income growth and changing financial attitudes.

This, combined with a real-estate boom, has turned Canadians into passive savers, with most of their money tied up in their homes, he said. And while financial assets, or more liquid assets, have been climbing in recent years, it's been mostly concentrated among older Canadians. At least 40 per cent of Canadian households have no financial savings outside of their personal savings and chequing accounts, he wrote.

Overall, CIBC recommended Canadians start building up their nest eggs — especially as guaranteed investment certificates offer low returns.

“The practical implication of this environment is that young Canadians today must start saving very early in their life compared to previous generations,” the report said. “Our findings as presented in this report suggest this is not happening.”

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